When Does the Burden of Proof Shift in CRA Assessments?
When the Canada Revenue Agency (CRA) issues a tax assessment, the general rule is clear: the taxpayer bears the initial burden of disproving the CRA’s assumptions. This principle is deeply entrenched in Canadian tax law, reflecting the self-reporting nature of the system. However, in certain cases, especially when dealing with derivative or third-party assessments under section 160 of the Income Tax Act, section 325 of the Excise Tax Act, or director’s liability assessments, the courts have recognized that the burden of proof may shift to the CRA.
A Toronto tax lawyer can help you understand when this applies and how to challenge an unfair assessment.
The General Rule: Taxpayer’s Burden
Canadian courts have consistently emphasized that taxpayers must disprove the CRA’s factual assumptions in an assessment. The rationale is straightforward: the taxpayer has control over the information and records about their own business and finances. Any shifting of that responsibility to the CRA risks undermining the self-reporting nature of the tax system.
When the Burden Shifts
Despite this general rule, courts have carved out important exceptions. In Holm et al v. The Queen and subsequent cases, judges recognized that requiring taxpayers to disprove assumptions exclusively within the CRA’s knowledge could result in unfairness. For example, if the underlying tax debt in a section 160 assessment is based on information solely within the CRA’s possession, it may be unreasonable to expect the taxpayer to challenge those facts without access to the same data.
In Orly Automobiles Inc. v. The Queen, the Federal Court of Appeal clarified that the onus may be reversed if:
- The underlying tax debt relates to facts or calculations known only to the CRA; and
- The taxpayer, by virtue of their relationship to the debtor, cannot reasonably obtain the necessary information.
In such circumstances, the CRA must prove the correctness of the original tax liability before holding the third party accountable.
Practical Implications for Taxpayers
Derivative assessments, such as those under section 160/325 (for transfers between non-arm’s length parties) or section 227.1/323 (director’s liability), often place taxpayers in a difficult position. While the CRA may expect them to challenge the underlying assessment, the taxpayer may not have access to the original debtor’s records. Courts have recognized that fairness requires shifting the onus back to the Minister in these situations. A Toronto tax lawyer experienced in section 160/325 and director liability cases can provide the legal strategy needed to push back.
That said, the burden does not automatically shift in every third-party assessment. Each case turns on its facts. If the taxpayer had a close relationship with the debtor corporation or individual, courts may expect that they had access to the relevant financial information.
Kirshen Tax Law Can Help
Challenging a third-party assessment requires a nuanced understanding of when the burden of proof may shift to the CRA. At Kirshen Tax Law, we represent clients in complex derivative liability cases, including property transfers and director liability assessments. Based in Toronto, we provide strategic advice and representation across Canada.
Contact us today for a free consultation with a Toronto tax lawyer.
Jeff Kirshen BA, JD (CA), JD (US)
Tax Lawyer | Founder, Kirshen Tax Law
Disclaimer
The content on this website, including articles and blog posts, is provided for general informational purposes only. It reflects the laws and regulations as of the date of publication, which may have since changed. This content is not intended to serve as legal advice and should not be relied upon as such. Tax laws and situations can be complex and unique to each individual. The information provided may not apply to your specific circumstances. For personalized advice regarding your tax or legal matters, we recommend consulting a qualified lawyer.